"Perhaps the sentiments put forth here are not yet sufficiently fashionable to procure them general favor. A long habit of not thinking a thing wrong gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason."
--Thomas Paine

Wednesday, July 15, 2009

The US economic turnaround may not be complete. The AIG turnaround may not be complete. The GM turnaround may not be complete. But Goldman Sachs is back.

“A Swift Return to Lofty Profits” proclaimed in the New York Times, as Goldman Sachs reported that it earned $3.44 billion in the second quarter, and is preparing its largest bonus payout in history. And without doubt, those lofty bonuses are well earned.

Consider how effectively Goldman has navigated the roiling waters of the global financial crisis. First, Goldman received a $10 billion injection of TARP funds to help it weather the market turmoil. Next, it swiftly converted itself into a commercial bank and member of the Federal Reserve system, gaining access to low or zero cost capital at the Fed Discount window and access to federally guaranteed borrowing through the FDIC Temporary Liquidity Guaranty Program. Finally, it garnered a $13 billion payout at one hundred cents on the dollar for its outstanding credit default swap contracts with AIG.

Now, we are told, Goldman’s profitability stems from its trading prowess in global markets. Really? A $3.44 billion profit in the second quarter could be accounted for simply by a 25% run-up in the value of the CDS portfolio from its value when AIG stood as a bankrupt counterparty.

No, Goldman may have trading prowess, but that pales against its political prowess.

Thirty years ago, most of the major Wall Street investment banks were partnerships, and those with the greatest prestige and market power—Salomon Brothers, Goldman Sachs, Lehman Brothers and Morgan Stanley—eschewed retail brokerage in favor of institutional relationships and proprietary trading. Only Merrill Lynch prided itself on retail brokerage and being a member of the New York Stock Exchange.

Then, the world changed, as investment banking firms looked far and wide for new ways to strengthen their balance sheets and access new pools of capital. One by one, the old-line partnerships fell by the wayside, casting aside their culture and independence for the lure of other people’s money. Salomon merged first with Phibro, and then was subsumed into the emerging Citibank colossus. Lehman was acquired by American Express. Morgan Stanley suffered the ignominy of merging into the Sears Roebuck/Dean Witter/Discover financial services company.

Only Goldman Sachs retained its culture and identity, even though it too tossed aside its partnership heritage in exchange for the lucre and capital offered through a public stock offering.

As one watches the evolution of Goldman, it is hard not to become a conspiracy theorist. After all, Goldman’s rise from merely the top of the heap into the stratosphere has come after years of growing influence in Washington as one Goldman partner after another were appointed to senior positions in the Cabinet or White House—John Whitehead, Robert Rubin, Josh Bolten, Hank Paulson, to name a few—and tens of millions of dollars of political contributions found their way from Goldman Sachs into the campaign war chests of members of Congress, of Senators and Presidents, Democrats and Republicans alike.

Perhaps the public interest and the private interest just happened to coincide with the passage of the Financial Services Modernization Act in 1999 and the Commodity Futures Modernization Act of 2000. Perhaps the conversion of Goldman Sachs—a non-depositary institution—into a commercial bank, with access to Fed Funds and the Discount window, and eligible for FDIC guarantees on its debt offerings was in the public interest. And perhaps the public interest was somehow served when Goldman and others jumped to the front of the line of AIG creditors and were made whole on their credit default swap contracts with a bankrupt counterparty.

Perhaps. But we must conclude—because we believe in truth, justice and the American way—that Robert Rubin, Josh Bolten and Hank Paulson influenced and guided public policy in ways that was truly in the public interest, and that there was no nefarious connection between all of those campaign dollars and the direction of our national policy in any manner that unduly benefitted Goldman Sachs over the years.

Perhaps. But this year, appearances matter. And this is the year that has seen $10 billion of TARP money and $13 billion of AIG money and who knows what amount of additional Federal Reserve funds or federal guarantee benefits flow into the coffers of Goldman Sachs.

So perhaps, this year, Goldman Sachs employees should be content with the tripling in value of their stock—surely a direct result of all of the financial largesse that has flowed Goldman’s way—and perhaps this is a year when $3.44 billion of Goldman Sachs profits should not turn into bonuses, without due consideration for how all of that was possible, and where that money came from.

Saturday, July 11, 2009

We have yet to see what the Iranian regime will be prepared to do in the face of real opposition. After all, the leaders of the opposition questioning the election results—Mir Hussein Mousavi, Mehdi Karroubi and Hashemi Rafsanjani, and others who have emerged as fellow travelers, including Ali Larijani and Mohammad Khatami—are each deeply routed in the Islamic revolution, and each served as either the leader of the parliament or the President of the Islamic republic.

More to the point, each rose to the top of Iran’s tightly controlled political apparatus, gaining personal power through a political system that excludes ex ante any candidate deemed to be a threat to the ruling regime. Therefore, one can fairly wonder why the Supreme Leader Ali Khamenei jumped the gun in declaring a winner, since the system was rigged before the vote. But apparently that was not enough.

Here in the realm of the Great Satan, we tend to view things through our own eyes. So before Michael Jackson, Mark Sanford and Sarah Palin drove Iran from our TV screens, we were fixated on the images of street protests in the wake of the Iranian election. For us, in Iran––as in Florida––the question was, “Who really won the vote.”

But as the images of Tehran have faded, debates over who won have given way to a clear understanding that the integrity of the election in Iran is not the measure of democracy there. At the same time, the Iranian regime is coming to realize that the integrity of the election, or lack thereof—whether perceived or real—may be its undoing.

From the moment the polls closed, when Supreme Leader Ayatollah Ali Khamenei declared the victory of President Ahmadinejad a “divine assessment,” Khamenei undercut his own credibility as a dispassionate ruler committed to the integrity of the electoral process. While Iranians may have come to accept limitations on what candidates are allowed on the ballot, fundamental Shia principles of fairness and justice demand that the integrity of the process be respected.

Instead of showing patience and respecting the process, Khamenei undermined his own credibility. But more important, he opened the door for the narrative that soon emerged: Those who questioned the results were guilty of apostasy. And in Islam, apostasy is a mortal sin, and such accusations have justified the most extreme incidents of Islamist violence.

Today, even though the demonstrations in the streets have disappeared from cable news, the debate in Iran has been elevated from vote counting and ballots to treason and apostasy. It doesn’t get much clearer than that.

The issue is no longer about the election results. The issue now is about the core principal of the Islamic Revolution—velayat-e faqih—that Islamic law requires that power over civil society must lie with the clerical order of Islamic jurists.

This debate is deeply rooted in the Islamic Revolution of 1979. At the time of the Revolution, Ayatollah Khomeini was the most vocal proponent among the senior Shia clerics of velayat-e faqih, while he was opposed at the time by his peer and rival Ayatollah Abul-Qassim Khoi, who disagreed with that interpretation of Islamic law, and dissented from the urge to assert clerical dominion over civil society. While Khomeini won the day and dominated the revolution against the Shah of Iran, velayat-e faqih has never been accepted across the senior Shia clerical order as settled law.

The debate over velayat-e faqih has reemerged as the central issue in Iran. Today, even as the Revolutionary Guard—the Praetorian Guard founded by Ayatollah Khomeini in 1979 to defend the clerical regime—is asserting its control over the streets of Tehran, Supreme Leader Ayatollah Ali Khamanei’s impatience in handling the election may ultimately cost the regime its legitimacy.

A central figure in the debate over velayat-e faqih will be the leading protégé of Ayatollah Khoi, Ayatollah Ali Sistani, the Iranian cleric who is demonstrating the principals of his mentor in his patient oversight of civil society and the emerging democracy in Iraq. For Iranians in the streets, as well as clerics in the holy city of Qom, Sistani is among the most revered religious figures, and a cleric of greater authority and stature than Ali Khamenei himself.

The irony is that none of the leading actors the Iranian drama, Mousavi, Karroubi, Rafsanjani, Larijani or Khatami have identified themselves with Sistani or opposition to the existing order of clerical dominion over civil society. They are each products of the existing system. And yet the principle of velayat-e faqih is what is at stake and will emerge as the issue at hand.

The prospect of change—counterrevolution by any reasonable definition—in Iran poses real dangers, as any evolution to a more open democratic process and easing of clerical dominance will yet face many hurdles, and may take many years. As Ali Khamenei loses stature due to his mishandling of the post-election period, the winner over the near term may well be President Mahmoud Ahmadinejad, whose ties to the Revolutionary Guard may allow him to assert greater power in Tehran, even as religious and legal arguments are debated in Qom. How the those debates play out in Qom may determine the long-term direction of the Iranian revolution, but how control over the Revolutionary Guard and the military evolves will likely determine whether the opposing camps in the post-election era reach a near-term accommodation, or Iran devolves instead toward a traditional dictatorship.